Deloitte and MAPI Study Indicates Manufacturing Faces Pressing Need to Evolve Risk Assessment Capabilities
A new study, “Understanding Risk Assessment Practices at Manufacturing Companies,” uncovers complex business risks and disruptors facing manufacturers, and a pressing need for the industry to evolve their risk assessment capabilities.
The study, jointly conducted by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI), looks at how manufacturing companies are assessing and responding to risks today and in the future. It finds that the current operating environment demands a more analytical, agile, and clinical view of risk to effectively address the complexity and velocity of critical risks and disruptions to their businesses.
“The pace and impact of innovation, coupled with cyber security risk, creates a risk environment that must be carefully managed,” said Brian Clark, partner, Deloitte & Touche LLP, and co-author of the study. “Product innovation can rapidly make existing products obsolete, potentially delivering considerable value to the innovator while leaving the unprepared facing competitive disadvantages. Further, technological innovation enables the manufacturing business model more, but can present a strategic risk as well. For manufacturers to thrive amid the ever-changing risk landscape, a company’s risk assessment practices should align with those changes.”
Unique risk aspects manufacturers should consider
Defining what characteristics can set a company apart competitively – today and in the future – is critically important for risk management. Survey respondents ranked competitiveness drivers such as innovation and talent management as priority business risks, indicating leading practices in these areas may set a company apart. Additionally, risk management and data analytics – areas where internal audit and risk executives are making significant investments – were also classified as competitiveness capabilities.
Supply chains are highly complex and continuously exposed to a variety of internal and external risks, and, if not managed carefully, can result in potential adverse impacts to manufacturers’ sales and brand reputations. The study indicates manufacturers should build resiliency into supply chains to address critical vulnerabilities proactively, as well as balance risk and costs to prevent or recover quickly from risk-related disruptions.
Implications of the skills gap in manufacturing can also pose a material impact on manufacturers’ growth and profitability. Internal audit can play a key strategic role in assessing programs – such as recruiting and retention initiatives, HR IT systems, and deployment of data analytics capabilities to monitor trends – designed to mitigate the anticipated talent shortage and skills gap risks.
Can today’s risk assessment techniques assess tomorrow’s top risks?
Survey respondents indicated a variety of successful and ineffective assessment practices. Successful practices include: interviews, periodic presentation of specific risk topics to the board committee tasked with governance, and integrating risk assessments into the strategic planning process with business units. Least-effective practices include: risk questionnaires or surveys that are too long or sent to too many people, accepting canned or repetitive risk mitigation responses, and risk assessments that are too narrowly focused.
Les Miller, internal audit council director and deputy general counsel of MAPI, noted, “Organizations should establish a risk assessment program that fits into its unique culture and risks. Since change is constant and can occur suddenly, ongoing efforts to enhance the sophistication and variety of risk assessment techniques are needed.”
Whether today’s risk assessment techniques can assess tomorrow’s risk is a difficult question to answer. Ultimately it is a question that can only be answered within the context of an organization given the first-hand knowledge of the culture and capabilities. Organizations should be examining this question regularly, and 70 percent of respondents say they perform annual or semi-annual events. According to the survey, these risk assessments generally consume less than 500 hours of time and predominantly focus on the global organization and evaluating the impact and likelihood of risk events.
The path forward
Manufacturers today should consider their overall approach to risk. Strategic risks may be the most crucial ones facing many manufacturers, and each company should consider how well its current approach identifies and assesses such risks. Identifying and monitoring key risk indicators supports a holistic approach. According to the study, it places greater emphasis on detecting risks surrounding core business assumptions at an early stage, rather than responding to such risks once they are much more evident and more difficult to mitigate.
A holistic approach to risk and risk assessment – as well as continual attention from a board risk committee, a chief risk officer or other champion, and internal audit – helps embed risk consideration within a manufacturer’s business culture. The enhanced ability to recognize and effectively address strategic risks can give a manufacturer a competitive advantage that enables it to not only survive, but thrive amid change.
For more information on the Deloitte and MAPI’s study on Understanding Risk Assessment Practices at Manufacturing Companies, please visit www.deloitte.com/us/RiskinMFG. Connect with us on Twitter: @DeloitteMFG, #mfgriskresponse and @MAPI_Mfg_Info #mfgriskresponse.
This survey was commissioned by Deloitte and MAPI, and was conducted online by MAPI during June of 2014. Respondents consist of 68 members of MAPI’s Internal Audit and Risk Management Councils, and the majority of respondents range in revenue size of $1 to $10 billion in annual revenue.
About The Manufacturers Alliance for Productivity and Innovation (MAPI)
MAPI is a member organization focused on building strong leadership within manufacturing, and driving the growth, profitability, and stature of global manufacturers. MAPI contributes to the competitiveness of U.S. manufacturing. MAPI provides the timely and unbiased information that business executives need to improve their strategies, boost productivity, and drive innovation. For more information, please visit www.mapi.net/about.
About Deloitte’s Risk Advisory Practice
Deloitte’s Risk Advisory practice helps organizations build value by taking a strategic risk approach to managing financial, technology and business risks. This approach helps clients focus on their areas of increased risk, bridge silos to effectively manage risk across organizational boundaries and seek not only risk mitigation, but also pursue intelligent risk taking as a means to value creation.
As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.